When a company won’t pay its vendors, the practical playbook is to escalate communication, send a formal demand letter, sue in small claims or civil court if that fails, and preserve special rights (like UCC security interests and bankruptcy administrative-expense claims) that can move you ahead of other creditors. The order matters, and so does the clock: every state sets a deadline for filing a breach-of-contract suit, and a bankruptcy filing by your customer will freeze your options overnight.
Start With Escalating Reminders and a Demand Letter
A polite email or phone call is the right first move. Invoices get lost in accounting systems, and a friendly nudge resolves most oversights. Confirm the client received the invoice, note the amount and due date, and ask when payment is coming. Keep the tone professional. This message may end up as evidence.
If that reminder is ignored, follow up within two weeks with a firmer message. Attach the original invoice, reference the payment terms in your contract, state how many days the payment is overdue, and ask for a specific response date. That second touch establishes a pattern of non-responsiveness you can use later.
When informal reminders fail, send a formal demand letter. This is the document that separates casual follow-up from serious collection effort, and it often prompts payment from companies that have been deprioritizing your invoice. A strong demand letter identifies the contract or purchase order, lists every unpaid invoice with its amount and original due date, states the total balance including any contractual interest, sets a firm payment deadline (10 to 15 business days is typical), and makes clear that you will pursue legal action or turn the debt over to collections if the deadline passes. Send it by certified mail so you have proof of delivery.
Build the Paper File Now
Once a dispute heads toward collections or court, gaps in your records become gaps in your case. Pull together:
- The contract or service agreement showing payment terms, due dates, and any late-fee provisions.
- Every unpaid invoice and the purchase orders that authorized the work.
- Proof of delivery or completion: signed receipts, shipping confirmations, or project completion forms.
- A chronological log of every email, letter, and phone call about the debt, including your demand letter and the certified mail receipt.
The communication log is the piece most vendors neglect, and it matters more than people expect. A judge or arbitrator wants to see that you made reasonable efforts to resolve the dispute before filing suit. A clean timeline of ignored reminders and broken promises does that work for you.
Watch the Statute of Limitations
Every state sets a statute of limitations for breach-of-contract claims. Once that window closes, you lose the right to sue no matter how strong your case is. For written contracts, the deadline ranges from three years in some states to ten or more in others. Oral agreements typically have shorter windows. The clock generally starts running from the date of the breach, which for an unpaid invoice usually means the day after payment was due.
Don’t assume you have years. Two of the biggest business states, Texas and California, both cap breach-of-contract suits at four years. If your contract has a choice-of-law clause naming a particular state, that state’s deadline controls. Check early so you don’t run out of time while trying informal resolution.
Take the Debt to Court
When demand letters and negotiations fail, a lawsuit is the next step. Which court you file in depends primarily on how much money is at stake.
Small Claims Court
For smaller debts, small claims court is fast, inexpensive, and doesn’t require a lawyer. Dollar limits vary widely by jurisdiction, from as low as $2,500 to as high as $25,000, with most states setting the threshold somewhere between $5,000 and $10,000. Filing fees are modest, and hearings are typically scheduled within a few weeks. You present your invoices, your contract, and your communication log to a judge who decides the case on the spot. Some jurisdictions restrict businesses from filing in small claims court or cap the amount lower for business plaintiffs, so check your local rules before filing.
Civil Lawsuit for Breach of Contract
Debts that exceed the small claims limit require a formal civil lawsuit, which means hiring an attorney, filing a complaint, and going through discovery and potentially a trial. The process is slower and more expensive, but it’s the only option for larger amounts. Your attorney will file a breach-of-contract claim showing that a valid contract existed, you performed your obligations, the other party failed to pay, and you suffered damages as a result. If your contract includes an attorney-fee provision requiring the losing party to pay, that shifts some of the financial risk away from you.
Collect on a Judgment
Winning a lawsuit gives you a court judgment, which is a legal declaration that the company owes you money. A judgment is not a check. The court doesn’t collect the money for you. Turning a judgment into actual cash takes additional steps.
The common enforcement tools are wage garnishment (for individuals or sole proprietors), bank levies that freeze and seize funds in the debtor’s bank account, and property liens that attach to real estate the debtor owns. To use these tools you typically need a writ of execution from the court, which authorizes a sheriff or marshal to carry out the collection. Judgments remain enforceable for years and can usually be renewed, so even if the debtor has no assets today, you can pursue collection later when their situation changes.
If the debtor is a business with no obvious assets, you may be able to conduct a debtor examination, a court-ordered hearing where the debtor must disclose income, bank accounts, and property under oath. That information tells you where to point the sheriff.
Use a Collection Agency or Factoring Instead
Two paths let you recover money without going to court, with trade-offs.
Collection Agencies
Collection agencies typically work on contingency: they take a percentage of whatever they collect and charge nothing upfront if they fail. Commercial contingency fees commonly range from 15% to 50% of the recovered amount, with the percentage climbing as the debt ages or shrinks. A $50,000 invoice that’s 60 days overdue will cost less to collect than a $5,000 invoice that’s been outstanding for a year.
One boundary worth knowing: the Fair Debt Collection Practices Act, which restricts how collectors contact debtors, applies only to debts incurred for personal, family, or household purposes and does not cover commercial debt collection.1Federal Reserve. Fair Debt Collection Practices Act Compliance Handbook Some states impose their own rules on commercial collectors, but federal FDCPA protections don’t apply to your business invoices.
Invoice Factoring
If you need cash now and can’t wait for a slow-paying customer, invoice factoring lets you sell unpaid invoices to a third-party company at a discount. The factor advances a percentage of the invoice value upfront, typically 85% to 95%, and then collects from your customer. Once they collect, they pay you the remaining balance minus their fee, which generally runs between 1% and 5% for the first 30 days. Factoring is a sale of your receivable, not a loan. You get immediate cash flow but give up a slice of the invoice value.
Protect Yourself Upfront With UCC Filings
If you regularly extend credit by delivering goods before receiving payment, a UCC-1 financing statement can protect you before problems start. Filing a UCC-1 with the secretary of state in the debtor’s jurisdiction registers your security interest in the goods you sold on credit. If the customer later becomes insolvent or files bankruptcy, you’ll be treated as a secured creditor rather than an unsecured one, which dramatically improves your chances of getting paid.2LII / Legal Information Institute. UCC Financing Statement
Vendors who supply inventory or raw materials should pay particular attention to purchase money security interests. A PMSI gives you priority over other secured creditors in the specific goods you supplied, even if those other creditors filed their security interests first. For inventory, this requires notifying existing secured creditors before delivery. For other goods, you have 20 days after the buyer takes possession to file your financing statement and still claim priority.3Legal Information Institute (LII) / Cornell Law School. UCC 9-324 Priority of Purchase-Money Security Interests The filing itself is inexpensive and straightforward. Getting the security agreement signed before you start shipping is the step most vendors skip. By the time a customer stops paying, it’s too late to negotiate collateral.
If the Customer Files Bankruptcy
A bankruptcy filing changes everything about your collection strategy. The moment a company files a petition, an automatic stay stops all collection activity cold. You cannot call the debtor, send demand letters, file or continue a lawsuit, or take any other action to collect outside the bankruptcy proceeding.4Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay Violating the stay can expose you to sanctions. Stop all collection efforts immediately once you learn of a filing.
File a Proof of Claim
To have any chance of recovering money through the bankruptcy case, you must file a proof of claim with the bankruptcy court. The court sets a specific deadline called the bar date, and missing it typically means you get nothing. In most Chapter 7 and Chapter 13 cases, creditors have 70 days from the date initially set for the meeting of creditors to file their proof of claim.5Legal Information Institute (LII) / Cornell Law School. Federal Rules of Bankruptcy Procedure – Rule 3002 The court will send you a notice with the exact date. Don’t wait until the last week.
Where Trade Vendors Sit in the Priority Line
Bankruptcy distributes money in a strict order set by federal law. Secured creditors with collateral get paid first from the value of that collateral. After that, the Bankruptcy Code lists ten tiers of priority claims, starting with domestic support obligations and continuing through administrative expenses, employee wages, tax obligations, and other categories.6Office of the Law Revision Counsel. 11 USC 507 – Priorities Most trade vendors are general unsecured creditors, which means they sit below all of those priority tiers and split whatever funds remain. In many cases, that means pennies on the dollar or nothing at all.
The 20-Day Administrative Expense Claim
One important exception can move a vendor up the line. If you shipped goods to the debtor in the ordinary course of business and those goods were received within 20 days before the bankruptcy filing, the value of those goods qualifies as an administrative expense claim.7Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses Administrative expenses sit near the top of the priority ladder and are paid ahead of general unsecured claims. Check your delivery records as soon as you learn of the filing. If any shipments fall within that 20-day window, assert the claim promptly.
Reclamation of Goods Delivered Before Filing
Vendors who delivered goods to an insolvent buyer may also have the right to demand those goods back rather than wait for a bankruptcy distribution. A seller who shipped goods in the ordinary course of business to a debtor that was insolvent when it received them can reclaim those goods if the debtor received them within 45 days before the bankruptcy filing. The seller must make a written reclamation demand no later than 45 days after the debtor received the goods, or within 20 days after the bankruptcy case begins if the 45-day period expires after filing.8Office of the Law Revision Counsel. 11 USC 546 – Limitations on Avoiding Powers Even if you miss the reclamation deadline, you can still assert the 20-day administrative expense claim. Act fast: review shipping records, calculate dates, and get a written demand out.
Write Off What You Can’t Collect
If you’ve exhausted your options and the debt is genuinely uncollectible, you may be able to deduct the loss as a business bad debt. Whether you qualify depends entirely on your accounting method.
If your business uses the accrual method, you likely recorded the unpaid invoice as income when you earned it. Because you included the amount in income, you can deduct it as a bad debt when it becomes partially or totally worthless.9Internal Revenue Service. Tax Guide for Small Business For a partially worthless debt, your deduction is limited to the amount you actually charge off on your books during the tax year. For a totally worthless debt, you can deduct the entire remaining balance.
If your business uses the cash method, you generally cannot take a bad debt deduction for unpaid invoices because you never included those amounts in income in the first place. You can’t deduct money you never reported receiving.10Internal Revenue Service. Topic No. 453 – Bad Debt Deduction Cash-method businesses can still deduct bad debts arising from actual cash loans made for business purposes, but an unpaid invoice for services rendered doesn’t qualify.
No single event automatically proves a debt is worthless. The IRS looks at the totality of the circumstances: the debtor’s financial condition, whether they’ve entered bankruptcy, whether they’ve stopped responding to collection attempts, and whether legal action would realistically produce results. Document your collection efforts thoroughly. That record is what supports the deduction if the IRS asks.